Budget ignores housing market risks: Moody's

Tax initiatives introduced in the 2017 federal budget to address housing affordability concerns will do little to alleviate the build-up of “latent risks” in the housing market, according to Moody’s Investors Service.

The federal budget, released on Tuesday, 9 May, outlined a number of changes designed to improve housing affordability, offering tax incentives for first home buyers and tougher rules on foreign investors.

These include allowing retirees to exceed the non-concessional super contribution cap when they downsize their home, creating a new savings account within the super system for first home buyers, limiting foreign ownership in new developments and charging foreign investors who leave properties unoccupied for six or more months a year.

Moody’s noted that these initiatives may prove successful in improving housing affordability over the long-term, but cautioned that an immediate impact on halting the build-up of risk in the housing market was “unlikely”.

“Latent risks in the housing market have been rising in recent years as significant house price appreciation in the core housing markets of Sydney and Melbourne have led to very high and rising household indebtedness,” the ratings agency said.

This increase in household debt coincides with a period of low wage growth and a structural shift in labour markets, Moody’s said, subsequently leading to a rise in underemployment

“Whilst mortgage affordability for most borrowers remains good at current interest rates, the reduction in the savings rate, the rise in household leverage and the rising prevalence of interest-only and investment loans are all indicators of rising risks,” Moody’s said.

The ratings agency cautioned that loan borrowers “are more vulnerable to change in financial conditions” and this put banks at higher risk of losses in their residential mortgage portfolios and “triggering negative second-order consequences for the broader economy”.